VIX

• The Options Institute Research Grant Program aims to support research that helps catalyze the advancement of derivatives usage and financial exchange marketplace structures.
• As the winners of this grant, sponsored by S&P DJI, Dr. Schoenleber and Dr. Vilkov will study the economics behind option-implied factor dispersion.
• Significantly, this research is expected to complement the planned launch of the Cboe S&P 500 Dispersion Index , a new volatility-related index jointly created by Cboe and S&P DJI.
• Cboe has been providing best-in-class investor education through the Options Institute, teaching the responsible use of options and trading strategies for more than 35 years.

• When Liz Truss and Kwasi Kwarteng’s tax-cutting mini-budget triggered a UK debt crisis in autumn 2022, the pound plummeted to almost parity with the US dollar.
• In 2023 the UK has endured weak growth, falling productivity and high inflation, yet the pound has been the strongest performing currency among the G10 leading economies.

Many thought last autumn that the pound would keep falling to dollar parity and below. What changed?

The Bank of England’s interest rate tightening is probably the key factor. Though also the government’s fiscal policy has been more restrained. Pound v US dollar 2021-23

But interest rates have been tightened in many countries. Why would it have made such a difference in the UK?

• The equivalent UK rate has gone up from just over 2% to 5%.
• Not only has the UK tightened more, the markets expect the Bank of England to keep tightening.
• Yet the pound has also gained against other currencies like the euro (rising from about €1.08 to €1.17 over the same period).

Why has the US dollar been losing value?

• The dollar is often seen as a measure of risk appetite – in other words, when the dollar is strong, there’s more pessimism in the global economy.
• The VIX index is evidence for this: it is a measure of how much fear is in the market.
• US inflation has been falling faster than in other countries, which all things being equal should cause the dollar to rise.

UK ten-year gilt yields are now higher than last autumn. Doesn’t that suggest sentiment about the UK has got worse?

• The rise in gilt yields since then reflects the rises in interest rates.
• UK 10-year gilt yields 2018-23

Is it unusual to see a currency strengthening so much when the economy is weak?

High inflation and rising government debt would normally be associated with a weakening currency, so the rising pound is not a reflection of UK fundamentals. It could reflect the fact that investors are expecting UK inflation to fall quickly, but that’s not what forecasts are saying. For example, NIESR (The National Institute of Economic and Social Research) thinks that inflation won’t return to 2% levels until 2025.

Many thought Brexit helped to cause the pound’s 2022 crash. Does the pound’s appreciation reflect investors feeling more optimistic about Brexit?

Probably the effects of Brexit on the pound were seen more in the one-off fall in 2016 after the referendum. The pound has never recovered to pre-Brexit levels. The pound’s performance over time

Who will win and lose from a stronger pound?

The winners will include consumers of imports and those travelling abroad, particularly to the US. Firms that buy goods in dollars will be benefiting. On the other hand, exporters are losing out.

Is it good news overall?

I would say so, yes. In general, it means that investor sentiment on the UK economy has improved and the gilt market has stabilised. It means there are net inflows into the UK economy (meaning more money is coming in than going out).

Where does the pound go from here?

• When last published in January, it suggested the pound was 12% undervalued against the US dollar.
• The question is whether the pound now keeps rising towards the sort of US$1.50 levels we used to see before Brexit.
• However, a rising pound is conditional on the public finances remaining healthy and inflation falling in line with expectations.

• The Investor Movement Index ® (IMXSM) increased to 5.46 in June, up from its score of 5.12 in May.
• The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.
• “In June, we again saw clients increasing their exposure overall, but net selling equities,” said Joe Mazzola, Director of Trading and Education at Charles Schwab.
• Despite increasing exposure, TD Ameritrade clients were net sellers of equities overall during the period.

• Ltd. (" Webull AU "), an Australian brokerage firm licensed by the Australian Securities Investment Commission that operates on the popular Webull trading platform, has announced the launch of a suite of Cboe Global Markets (Cboe) US index options on 23 April 2023.
• This new offering allows Australian retail investors access to cash-settled index options trading through Cboe’s popular US options suite, including the S&P 500 Index (SPX) options, Cboe Volatility Index (VIX) options and Mini-S&P 500 Index (XSP) options.
• “Webull AU is committed to providing its users with the best investment opportunities, and the launch of Cboe options is a testament to that commitment.
• Through Webull, we are excited to further extend these offerings to Australian investors, who can now benefit from the potential utility that options provide.”